This is the time of year when the start of school is right around the corner or already upon many students. As kids sharpen their pencils and get themselves organized for another school year, adults can do the same thing with their own financial and retirement education.
Why is financial education worthwhile at any age or stage? Now more than ever before, we have more responsibility for our own retirement. Yet, many people don't understand their finances and have unrealistic expectations for retirement. According to an ING U.S. online poll of 2,400 individuals, more than one-third (36 percent) believe $500,000 or less in savings will provide a comfortable level of income in retirement or they don't know how much they would need. To break through unrealistic expectations and learn the basics of retirement planning, it may be time for you to go "back to school" to pursue your degree in retirement readiness. Here are a few ways to get your retirement tutorial underway.
Know your numbers... today.
In order to have confidence and be an A+ student in retirement readiness, start to study your day-to-day finances. First, get a grasp on your monthly budget and cash flow (which is essentially all the money coming in and going out of your household). This helps you to take the next step and tackle your net worth, which includes all your assets minus your liabilities. Together, knowing your cash flow and net worth helps you better plan for today and tomorrow.
Don't approach this assignment like an all-night cram session before the final exam, but rather, invest time and energy every week to build your knowledge. As the old adage goes, slow and steady wins the race. Set aside a time every week -- say, an hour every Saturday afternoon -- that you commit to studying your personal finances. There are many online tools and education resources to help you get started and organized. Even an Excel spreadsheet or simple pen and paper exercise can do the trick to get the ball rolling. Eventually, your studies and growing curiosity about your financial health could lead you to a financial adviser for advanced studies.
Know your numbers for retirement.
Many people of all ages come into my office saying "I want to retire sooner rather than later. How can you help make that happen?" The first step we take after this is to back up and look at their budget and net worth today. You need to know where you are today to know where you are going tomorrow. After we get that under control, then we start to back into the retirement discussion.
We talk about lifestyle today and in retirement, risk tolerance, health concerns, ideal retirement age and much more. We discuss how cash flow could change in retirement. Perhaps your house is paid off so you eliminate mortgage expense, but medical costs increase due to changes in health or different health insurance. Or, maybe you spend less on clothes and dry cleaning, but new travel expenses crop up. These conversations are like big jigsaw puzzles where we have to make all the pieces fit together to create a vivid retirement picture based on reality, not fantasy or false expectations.
Don't shy away from reality. Knowledge is power.
It is much better to know the reality of your retirement situation early on. Staying with the school analogy, it is much better to know mid-semester if your grades are not where they should be instead of finding out at the end when you can't change the outcome. With advance knowledge, there is more time to develop and implement a solution. And a more realistic perspective earlier means less chance of having your hopes dashed after retirement. A failing grade does not feel good whether you are 16 or 86 years old.
As a financial adviser, I am often the one who delivers the reality check for my clients. While the process can be painful, I know that it is getting them to a better position and truly ready for a successful retirement. Perhaps you need a reality check that retiring early, buying a second home or selling a business is not a realistic plan for retirement security. You can still get to where you want to be, but may need to shift your expectations or make different decisions today with your investments and saving. I find that people are often relieved to have a plan that is realistic and that they can confidently carry out.
Get a study group going.
Your financial education needs to involve other people -- your spouse, family, friends, a financial adviser. Money is a very emotional topic, so getting third-party perspective and validation can help you stick to the syllabus. A financial adviser can help you make appropriate choices for your situation, as well as, inspire you to stay true to your financial plan, even when economic conditions may persuade you to second guess your judgment.
Don't let another school year go by without pursuing your education in retirement readiness. While there may not be an official degree or graduation ceremony to mark your success, you'll have earned a much bigger prize at the end of the day with a happy and prosperous retirement.
Securities and Investment advisory services offered through ING Financial Partners, Member SIPC. Neither ING Financial Partners nor its representatives offer tax advice.